The complexity of insurance contracts places the average consumer at a disadvantage in the marketplace. This is especially evident in homeowners and automobile insurance.
Before buying an insurance product, consumers need clear, comprehensive disclosures so they can understand its scope, nature, and cost. These disclosures should be easy to compare so consumers can evaluate policy benefits across providers (see also Chapter 8, Long-Term Services and Supports—Private Long-Term Care Insurance).
Experience from recent natural disasters shows that many policyholders who expected their residential policy to cover most of the damage to their homes regardless of cause were unpleasantly surprised to find out what was actually covered. The need to purchase separate policies for various hazards (flood, wind, and others) and to deal with separate adjusters after an incident was cumbersome and inefficient. The National Association of Insurance Commissioners (NAIC) has proposed the development of all-perils coverage backed by the National Flood Insurance Program.
Auto insurance is essential for everyone who owns a car. Some policies, however, drastically raise premiums or drop coverage once policyholders reach a certain age, regardless of driving record. In addition, auto insurance rates may reflect factors beyond driving behavior in ways that increase premiums for certain groups. For example, unless prohibited by state law, an insurer may take into account the policyholder’s marital status, income, education, or credit score based on correlations between these factors and supposed risk. The use of credit scores has been defended on the theory that drivers with higher credit scores are less likely to file excessive or frivolous claims.
Individual states approach auto insurance liability differently, offering a no-fault system, a tort-based system, or variations between the two. A number of states have put in place no-fault systems, in which the insurance policy covers personal injury costs regardless of who was at fault. This is in contrast to states with so-called tort-based policies, which require policyholders to go to court to recover claims if there is a dispute over who is at fault. No-fault policies provide faster, more efficient processing of claims. They often are coupled with restrictions on excessive litigation in order to reduce costs to policyholders. Tort states often offer less coverage, but with more affordable premiums. It can be difficult to find automobile insurance that is affordable, has some flexibility in coverage amounts, and is offered on fair, nondiscriminatory terms.
Another area where insurance coverage issues have arisen relates to natural disasters. Natural disasters and climate change have revealed major shortcomings in and put major strains on the country’s property insurance. Households with low incomes and retirees living on fixed incomes are hit particularly hard. Insurance is difficult to find and expensive for those living in high-risk areas. Moreover, some homeowner’s insurance policies do not require payment for losses from two events happening at the same time. This has allowed insurers to deny coverage altogether if a small portion of damage can be attributed to a cause other than what is covered.
Some companies have enforced stricter underwriting standards to limit their exposure in high-risk areas. Others have limited the types of properties they insure. Some insurers have been forced to leave certain markets altogether.
States have taken a number of actions to improve the availability and affordability of insurance in coastal areas, which are particularly at risk for weather related damage. Some, such as Florida, have created government reinsurance programs that make it more manageable for private insurers to cover losses, thereby making adequate coverage more affordable. Many have created state catastrophe funds to provide additional insurance capacity by allowing private insurance companies to set aside money tax-free for covered losses, and many have set up state-run “wind pools” as insurers-of-last-resort.
States have also taken steps to make buildings better able to withstand the impact of major storms by:
- adopting and enforcing risk-based building codes and strengthening land-use planning;
- providing home inspections to identify potential storm-resistance improvements;
- implementing programs to reinforce existing structures, including financial assistance for owners with low incomes; and
- mandating premium discounts for homeowners who implement approved mitigation measures.
Consumers and businesses may be unable to obtain liability insurance or face prohibitively high costs to stay insured, due to a variety of risk factors around a vehicle, property, business, or other asset.
Insurance in the sharing economy—sharing economy companies use online platforms to connect people wanting to exchange goods or services with people who need them (see also this chapter’s section on Innovation for All). Challenges can arise when a customer is harmed and the individual providing the good or service does not have adequate insurance.
INSURANCE POLICY TERMS: Policy
Availability of coverage
Policymakers should require fair terms and conditions in insurance to ensure availability and coverage. Insurance companies should be prohibited from:
- denying access to insurance coverage provided in the policy,
- refusing to insure people,
- canceling or failing to renew policies,
- unfairly raising premiums,
- reducing death benefits, or
- unfairly limiting coverage—this is especially a concern for vulnerable or underserved populations including people with disabilities, people with preexisting conditions or chronic illnesses, and older people. Age alone should not be used to limit coverage.
Insurance redlining should be illegal. Insurers should also be prohibited from raising costs unfairly or severely limiting service in neighborhoods with certain racial or ethnic makeups.
Insurance companies should be encouraged to improve benefits and coverage for mental illness treated by a licensed mental health practitioner (see also Chapter 7, Health: Specific Needs and Services—Mental Health).
Fair pricing for all
States should require insurance companies to make their products available at fair and reasonable rates, including to people with disabilities, preexisting conditions, or chronic illnesses.
Policymakers and the private sector should study the impact on consumers of using credit scores to underwrite insurance. State policymakers should consider restricting the practice in cases in which using credit scores may result in higher rates that overstate the actual risk. Insurance companies should clearly disclose to consumers the factors that are used to determine rates, including credit scores.
State policymakers should consider limiting the ability of auto insurance companies in particular to use non-driving rating factors that are not related to risk.
Disclosures and transparency
Insurance companies should be required to provide clear, informative outlines of coverage before customers buy policies. They should reduce the complexity of consumer decision-making. This includes offering all-perils homeowners’ insurance policies. In particular, companies must be required to disclose the limitations and exclusions in their individual and group health plans and auto and homeowners policies fully.
State insurance departments and insurance companies should be required to provide objective, usable, and comparative consumer information on costs and coverage. They also should provide post-sale disclosure of paid-up life insurance options.
States should develop standard disclosures for the sale of limited-benefit plans including dreaded disease insurance. While these plans may cover the high costs of serious illness, they only pay out under certain conditions and do not substitute for comprehensive health insurance. These disclosures should explain clearly the terms, including portability, before the sale.
Consumers should be able to have their questions about insurance options answered easily. They should also understand insurance-related complaint procedures. Education should include a focus on issues such as the need for loss control and risk management in the liability area. Loss control measures, such as automobile insurers encouraging safe driving classes or property insurers requiring fire suppression systems, reduce the risks that consumers and businesses face and may also thereby reduce premiums. This policy applies to individual consumers as well as organizations, agencies, and small businesses.
States should establish and publicize government- or industry-funded hotlines that would answer consumers’ insurance questions.
Long-term care insurance providers should disclose covered benefits and related terms and conditions, including eligibility, renewability, preexisting conditions, non-duplication of coverage provisions, coverage of dependents, termination, continuation or conversion, limitations, exceptions, reductions, and elimination periods. These should be disclosed fully and understandably.
Insurers should disclose whether a policy provides coverage for less-than-skilled-nursing home care and the extent of home- and community-based care benefits.
The state insurance commissioner should also require insurers to include specific information on long-term care benefits under public and private insurance programs.
Policymakers should require insurance claims to be processed quickly and accurately. They should put in place high claims processing standards applicable to all commercial and subscriber insurance service organizations.
Policyholders should be compensated reasonably and in a timely manner for claims resulting from auto accidents. Auto insurance should provide adequate coverage at a reasonable cost.
Insurance companies should not be allowed to cancel auto insurance policies or raise rates on the basis of age alone. Failing to renew is a form of cancellation under this policy.
States should avoid enacting a “choice” automobile insurance law (which allows consumers to choose between no-fault coverage and traditional liability coverage) that would lower benefits or result in insufficient protection.
States should support reduced automobile liability insurance rates for drivers upon successful completion of state-approved driver-improvement courses.
Insurance for natural disasters
Policymakers should ensure the availability and affordability of insurance coverage for natural disasters. Renters and homeowners should carry adequate insurance to protect them against losses from natural disasters.
Policymakers should consider creating programs to ensure coverage in such events. These include:
- government insurance and reinsurance programs that are accurately and fairly priced, particularly when private insurers and reinsurers are charging excessively high rates; and
- catastrophe funds.
States should ensure fair claims handling by requiring insurers to itemize outstanding claims and requiring insurance departments to monitor progress toward their resolution.
State and local governments should adopt and uniformly enforce strong, risk-based building codes, land-use planning, and programs designed to reinforce existing structures. Programs can include home inspections and financial assistance for owners and purchasers who have low or fixed incomes.
States should mandate and publicize insurance premium discounts for people who implement approved mitigation measures.
States should develop and implement storm-resistance labeling programs to encourage market demand for homes meeting higher construction standards.
State housing and housing credit programs should encourage the purchase of homes that meet stringent code standards, particularly in high-risk areas.
States should explore new options to guarantee the availability of liability insurance to those who need it.
States should consider expanding insurance to create new forms of risk-sharing, such as market assistance plans and joint underwriting associations. If these prove insufficient, states should establish mandatory risk-sharing or assigned-risk programs. These alternatives must be regulated as carefully as regular insurance companies are in order to protect policyholders.
Regulators should allow liability policies to be canceled before the expiration date only when there is good cause, such as failure to pay premiums, and after reasonable notice is provided. Refusals to renew should require a written explanation and a reasonable notice period. There must be protections against non-renewals for certain types of insurance, such as medical malpractice.